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External Balance Sheets as Countercyclical Crisis Buffers

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  • Joyce, Joseph

Abstract

The external balance sheets of many emerging market countries are distinguished by their holdings of assets primarily in the form of foreign debt and foreign exchange reserves, while their liabilities are predominantly equity, either FDI or portfolio. In this paper we investigate the claim that this composition served as a buffer for the emerging markets during the global financial crisis of 2008-09. We use data from a sample of 67 emerging market and advanced economies, and several indicators of the crisis are utilized: GDP growth rates in 2008-09, the occurrence of bank crises and the use of IMF credit. Our results show that those countries that issued FDI liabilities had higher growth rates, fewer bank crises and were less likely to borrow from the IMF. Countries with debt liabilities, on the other hand, had more bank crises and were more likely to use IMF credit. We conclude that the “long debt, short equity” strategy of emerging markets did mitigate the effects of the global financial crisis.

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  • Joyce, Joseph, 2015. "External Balance Sheets as Countercyclical Crisis Buffers," MPRA Paper 66039, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:66039
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    References listed on IDEAS

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    Cited by:

    1. Joyce, Joseph, 2016. "Partners, Not Debtors: The External Liabilities of Emerging Market Economies," MPRA Paper 73880, University Library of Munich, Germany.
    2. Sophia Latsos & Gunther Schnabl, 2018. "Net foreign asset positions and appreciation expectations on the Swiss franc and the Japanese Yen," International Economics and Economic Policy, Springer, vol. 15(2), pages 261-280, April.
    3. Michael Chui & Emese Kuruc & Philip Turner, 2016. "A new dimension to currency mismatches in the emerging markets - non-financial companies," BIS Working Papers 550, Bank for International Settlements.

    More about this item

    Keywords

    external balance sheet; foreign assets and liabilities; FDI; portfolio equity; debt;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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